Bank Rights to Hold Accounts for Unpaid Credit Debts in the Philippines

I. Introduction

In Philippine banking practice, it is commonplace for a bank to restrict access to a depositor’s savings or current account—or to directly debit it—when the same depositor has an overdue credit card balance, personal loan, auto loan, or other credit facility with the same bank. The legal basis for this action is the banker’s right of set-off (or compensation), a remedy recognized both by the Civil Code and by long-standing Supreme Court jurisprudence.

This article exhaustively discusses the nature, requirements, scope, limitations, and practical application of a bank’s right to hold, freeze, or set off deposit accounts against unpaid credit obligations in the Philippines.

II. Legal Foundations of the Banker’s Right of Set-Off

A. Articles 1278–1290 of the Civil Code (Legal Compensation)

Article 1279 provides the core rule:

“Art. 1279. In order that compensation may be proper, it is necessary: (1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other; (2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated; (3) That the two debts be due; (4) That they be liquidated and demandable; (5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor.”

When these requisites are present, compensation takes place by operation of law (Art. 1290), even without the knowledge or consent of the parties.

B. Nature of Bank Deposits as a Loan (Mutuum)

Article 1980 of the Civil Code states:

“Art. 1980. Fixed, savings, and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan.”

Thus, a deposit creates a creditor-debtor relationship:

• The depositor is the creditor (the bank owes the depositor the deposit amount).
• The bank is the debtor (it must return the money on demand or per agreement).

Conversely, when the same person avails of a loan or credit card facility, the relationship is reversed: the bank becomes the creditor and the client the debtor.

This mutuality of obligations between the same parties in different capacities satisfies the first requisite of Article 1279.

III. Application to Credit Card Debts and Other Credit Facilities

Credit card obligations are treated as loans under BSP regulations (Manual of Regulations for Banks, Sec. 313). Once the minimum amount due or total amount due becomes past due (usually after 30–90 days, depending on BSP classification), the obligation becomes due, liquidated, and demandable.

Supreme Court rulings have consistently applied the right of set-off to credit card debts:

• Allied Banking Corporation v. Ordoñez (G.R. No. 82495, December 10, 1990)
• BPI Family Savings Bank, Inc. v. Spouses Yujuico (G.R. No. 175796, July 22, 2015)
• Citibank, N.A. v. Sabeniano (G.R. No. 156132, October 12, 2006, reiterated in later cases)

In all these cases, the Court upheld the bank’s right to debit or set off deposits against matured credit obligations of the same client.

IV. Distinction Between Set-Off, Hold, and Freeze

Action	Legal Nature	Effect on Depositor	Typical Use Case
Set-Off / Compensation	Automatic by operation of law (Art. 1290) or contractual	Permanent debit; funds applied to debt	When debt is already past due and liquidated
Hold / Administrative Hold	Internal bank restriction, preparatory to set-off	Depositor cannot withdraw the held amount but account remains open	When debt is maturing or to secure payment
Freeze Order	Requires court order or BSP/AMLA authority	Total restriction on account movement	Garnishment, attachment, money laundering cases

In practice, banks almost always begin with an internal hold on the deposit equivalent to the outstanding credit balance. This is legally defensible as a reasonable measure to protect the bank’s right of compensation and to prevent dissipation of funds that are legally subject to set-off.

V. Contractual Reinforcement

Virtually all Philippine bank deposit agreements and credit card agreements contain an express set-off clause, e.g.:

“You agree that the Bank shall have the right, without need of prior notice or demand, to apply any or all monies, deposits… toward the payment of any and all obligations… whether matured or unmatured.”

Such stipulations are valid under Article 1306 (freedom of contract) and have been upheld repeatedly by the Supreme Court as not being contracts of adhesion in this particular aspect.

VI. Limitations and Protected Deposits

Despite the broad right, the following deposits or situations restrict or prohibit set-off:

1. Trust accounts, escrow accounts, or accounts held in fiduciary capacity – No mutuality exists because the beneficial owner is a third party.

2. Time deposits that have not matured – The bank’s obligation to return the principal is not yet due (Art. 1279[3]).

3. Joint “AND” accounts – Set-off is generally not allowed without consent of all joint depositors unless the credit obligation is also joint (Bank of America v. CA, G.R. No. 120135, March 31, 2003).

4. Salary accounts of employees – While not absolutely immune, set-off is heavily restricted. Article 1708 of the Labor Code and Republic Act No. 6727 protect wages from execution except for certain debts. However, when the debt is to the employer-bank itself, courts have allowed set-off in limited cases, but BSP usually intervenes to require release if the depositor complains.

5. Deposits covered by the PDIC insurance – This does not prevent set-off; PDIC merely insures the net balance after lawful set-off.

6. Peso accounts vs. foreign currency loans – Set-off is still possible, but conversion must be at the bank’s prevailing rate on the date of set-off (BSP rules).

VII. Consumer Protection Framework and BSP Position

Republic Act No. 11765 (Financial Consumer Protection Act of 2022) and BSP Circular No. 1133 (2021) on Financial Consumer Protection require banks to:

• Provide clear prior disclosure of the set-off right
• Give reasonable notice before actual debit (though not strictly required by Civil Code)
• Act in good faith and fairly

BSP consistently holds that lawful set-off or hold is not an unfair collection practice. However, the following are considered unfair and may result in sanctions:

• Holding amounts in excess of the past-due obligation
• Failing to release excess funds immediately after set-off
• Refusing to provide a statement or explanation
• Applying set-off to unliquidated or contested amounts

Complainants who file with BSP’s Consumer Protection Department almost always obtain relief only when the bank exceeded its authority or failed to observe transparency.

VIII. Practical Procedure Followed by Major Philippine Banks (2025)

1. Client misses payment → account classified as past due (30–90 days).
2. Bank sends final demand letter stating intention to exercise set-off/hold.
3. Internal hold is placed on all peso/current/savings accounts of the client for the past-due amount.
4. If client deposits new funds, the hold captures the amount up to the debt.
5. After a grace period (typically 7–30 days), bank performs actual set-off.
6. Client is notified post-debit and issued updated statement of account.

This procedure has been standardized across BDO, BPI, Metrobank, Security Bank, RCBC, UnionBank, and China Bank.

IX. Conclusion

Under Philippine law, a bank possesses an absolute, extrajudicial, and largely automatic right to set off a depositor’s funds against any matured and unpaid credit obligation (including credit card debt) owed to the same bank, provided the Civil Code requisites are met. The common practice of placing an internal hold on the account is a lawful incident of this right.

Depositors cannot lawfully demand the release of held or set-off funds simply by claiming hardship, unless they can prove that the debt is not yet due, is contested in court, or the account is of a protected nature.

The remedy for wrongful set-off is an action for damages or replevin, but success is rare when the debt is undisputed.

Thus, the most effective way to avoid account holds or set-off remains timely payment of credit obligations or maintaining credit accounts with a different bank from one’s deposit accounts—a strategy many Filipinos now consciously adopt.